tan yi yuan yuan school of insurance, central university of finance and economics

Agricultural Insurance and the urban-rural income gap-- Based on a dynamic panel model of the GMM estimation

Tan YiYuan Yuan

School of Insurance, Central University of Finance and EconomicsBeijing, ChinaJuly 19, 2013

Outline of Topics

IntroductionReview of LiteraturesVariables and ModelThe analysis of the resultsConclusion Reference

Introduction

Review of LiteraturesVariables and model

The analysis of the results Conclusion

The motivation of the research

The motivation of the researchMethod and data

• In 2007, China‘s ministry of finance released “The central finance agricultural insurance premium subsidies pilot management approach”

• Agricultural insurance's premium income in 2007-2011 respectively was 50.54 billion, 109.52 billion, 132.83 billion, 133.55 billion, 176.04billion.

• Agricultural insurance's premium income was 11.94 billion in total from 1980 to 2006.

• Premium income in 2011 was 1.47 times the sum of the premium for the past 27 years.

• The intention of agricultural insurance is to use the risk transfer mechanisms to stabilize farmers' income and narrow the urban-rural income gap.

• Therefore, the paper tries to answer "Agricultural insurance can narrow the urban-rural income gap or not", which based on the model of the GMM dynamic panel estimation methods.

Introduction



Method and data

The motivation of the researchMethod and data

• Dynamic panel model: Fixed effect model and Random effect model

• System General Method of Moments(SYS-GMM): In order to overcome the problem of endogeneity

• 2007-2012 Yearbook of China Insurance• 2007-2012 Yearbook of China Statistical

Introduction



Agricultural insurance

Agricultural insuranceUrban-rural income gap

Firstly, the agricultural insurance can reduce the urban-rural income gap Secondly, agricultural insurance can transfer a poor and pure internal risk

to the outside, in order to avoid rural residents into deeper poverty. Finally, the agricultural insurance can effectively reduce the risk of credit

default and make it possible for farmers to loan.

Gao Jie (2008) The results showed that agricultural insurance expenses have on impact on farmers' income, which did not show a positive relationship of the theory that agricultural insurance on farmers' income.

Liang Ping et al (2008) The paper found that agricultural insurance and income of farmers had a long-term cointegration relationship by VECM model. And agricultural insurance was the granger causes of farmers' income growth.

Introduction



Urban-rural income gap

Agricultural insuranceUrban-rural income gap

The first theory is urbanization.The structure of urban-rural’ urbanization has a huge difference.

China's urbanization process is so slow that enlarges the urban-rural income gap (Lu Ming and Chen Zhao, 2004; Zhou Yunbo, 2009; Liu Tian, 2013)

The second theory is government.The government did not pay adequate support to farmers, such as

educational resources, social security and so on.( Li Wei and Lu Ming, 2005; Tian Shichao, 2007; Jane must Maki, 2013)

The third is financial theory.Financial development is not balanced, and it will not help to optimize

the efficiency of resource allocation. (Sun Yongqiang and Wan Yulin, 2011; Ye Zhiqiang, Chen Xi and Zhang Shunming, 2011)

Introduction

Review of LiteraturesVariables and Model


Variables

VariablesModel

Variable Variable Variable Meaning MethodDependent gap Income gap Urban residents' disposable income/

net income of rural residentsIndependent claim insurance claims Total agricultural insurance claimsControl gdp Gdp per capita GDP/total population

fi Per capita investment in fixed assets

Investment in fixed assets/ total population

edu Per capita investment in education funding

Education funding / total population

tra Per capita traffic mileage Road and rail mileage / total population

ubr Urbanization Non-agricultural population/total population

open Openness Total imports and exports / GDPnonsoe Ownership Structure Non-state-owned employment/

employmentgov Expenditure Expenditure / GDP

Introduction



The basic characteristics of data variablesVariables Name Mean S Min Max

Dependent lngap 1.1043 0.1827 0.7264 1.5036

Independent lnclaim 4.3998 1.8636 -2.8134 6.9637

Control lngdp 0.9522 0.5144 -0.2305 2.1216

lnfi 0.4341 0.4842 -0.8918 1.6517

lnedu -2.4790 0.4586 -3.3578 -1.3561

lntra 3.4278 0.6476 1.6760 5.3462

lnubr -0.7433 0.2823 -1.4867 -0.1131

lnopen -1.7201 1.0065 -3.3490 0.5095

lnnonsoe -.1398 0.0827 -0.5525 -0.0544

lngov -1.6157 0.4842 -2.4368 0.2242

VariablesModel

Introduction



Figure 1 and Figure 2

Figure 1 and figure 2 showed that agricultural insurance and the income gap may exist certain a linear relationship. In the following paragraphs, we will analyze the relationship based on GMM estimation.

VariablesModel

Introduction



Model

In order to accurately quantify the impact of urban-rural income gap factors, we refer to Lu Ming and Chen Zhao (2004), Clarke et al. (2006), Beck et al. (2007) and other studies of urban-rural income gap model.

VariablesModel

31

01

ln (1)i i i k ik ik

gap gap controlX

0 1 2 3 4

5 6 7 8 9

ln ln ln lnln ln ln ln ln (2)i i i i i i i

i i i i i i

gap gap lnclaim gdp fi edutra ubr open nonsoe gov u

0 1 1 2 3 4

5 6 7 8 9

ln ln ln lnln ln ln ln ln (3)i i it it it it it

it it it it it it

gap gap lnclaim gdp fi edutra ubr open nonsoe gov u

Introduction



Regression results-1

Table 1 Agricultural insurance and Urban-rural income gap

Note: ***, **, * represent 1%, 5%, 10% significant level.

Variable OLS (1) RE (2) FE (3) GMM (4) GMM (5) GMM (6)L.lngap - - - 0.3224***（ 8.74） 0.3304***（ 22.07） 0.2495***（ 3.03）lngdp -0.1091（ -1.57） -0.2749**（ -1.57） -0.2736**（ -2.41） -0.2076***（ -22.61） -0.4377***（ -11.07） -0.4002***（ 0.29）

lnclaim -0.0143*（ -1.83） -0.0143***（ -1.83） -0.0139**（ -2.29） -0.0106***（ -3.32） -0.0061**（ -2.28） -0.0051***（ 0.99）lnfi -0.1091（ -1.53） -0.1091**（ -1.53） -0.1181**（ -2.39） -0.1763**（ -14.10） -0.1788***（ -8.74） -0.2459***（ -7.65）

lnedu 0.2561**（ 2.47） 0.2561***（ 2.47） 0.2877***（ 3.21） -0.0036（ -0.27） 0.3899***（ 15.14） 0.3813***（ 4.54）lntra 0.0412（ 0.84） 0.0412（ 0.84） 0.0434（ 1.64） -0.0020（ -0.12） -0.0193**（ -2.43） -0.0963***（ -2.95）lnubr 0.0125（ 0.07） 0.0125（ 0.07） 0.0006（ 0.01） - -0.0785（ -1.44） -0.0869（ -0.86）

lnopen 0.0523*（ -1.81） 0.0523***（ -1.81） 0.0558***（ -3.31） - 0.0427***（ -5.71） 0.0252***（ -3.84）lnnonsoe 0.3789*（ 2.00） 0.3789***（ 2.00） 0.4134**（ 2.53） - 0.2963*（ 1.96） 0.3984（ 1.22）

lngov -0.1274（ -1.38） -0.1274*（ -1.38） -0.1451**（ -2.12） - -0.2994***（ -19.68） -0.1832***（ -2.75）Sargan test - - - 0.221 0.396 0.349Hansen test - - - 0.274 0.113 0.228AR(2) test - - - 0.181 0.515 0.160Province 31 31 31 31 31 28

Introduction




Table 1 Agricultural insurance and Urban-rural income gapThe summary of regression results• whether it is mixed regression, random effects regression or fixed effects

regression, agricultural insurance and income gap have the negative correlation.

Agricultural insurance and income gap• The quantitative analysis of the impact of agricultural insurance on income gap is

also quite significant.

Control variables and income gap• Economic development(-0.4377) , investment(-0.1788), tra(-0.0193), gov(-

0.2944)• Education(0.3899), Open (0.0427) and ownership structure(0.2953)

Introduction




The internal mechanism Through the above analysis, we found that agricultural insurance will reduce

the urban-rural income gap. But we are not sure of specific mechanisms that how agricultural insurance affect the urban-rural income gap.

In order to accurately grasp the mechanisms, we must examine the relationship between agricultural insurance and income growth.

In order to control regional fixed effects, time fixed effects and endogeneity, we follow the model (3).

1 2 3 4 5

6 7 8 9

ln ln ln ln lnln ln ln ln (4)

it it it it it

it it it it it

rural lnclaim gdp fi edu traubr open nonsoe gov u

1 2 3 4 5

6 7 8 9

ln ln ln ln lnln ln ln ln (5)

it it it it it

it it it it it

urban lnclaim gdp fi edu traubr open nonsoe gov u

1 2 3 4 5

6 7 8

ln ln ln ln lnln ln ln (6)

it it it it it

it it it it

gdp lnclaim fi edu tra ubropen nonsoe gov u

Introduction




Table 2 The internal mechanism


Variable GMM (1) GMM (2) GMM(3)

lnrural lnurban lngdp

L. 0.3437***（ 5.71） 0.0499**（ 0.73） 0.0040*（ 0.21）lngdp 0.1576***（ 2.26） 0.4117***（ 6.72） -

lnclaim 0.0102**（ 0.32） 0.0022（ 0.60） 0.0009***（ 0.03）lnfi 0.1468***（ 3.78） 0.3276***（ 5.61） 0.3034***（ 5.12）

lnedu -0.2758***（ -4.02） 0.1051**（ 2.19） 0.6357***（ 27.39）lntra -0.0680***（ -3.31） -0.1032***（ -7.25） 0.0017（ 0.20）lnubr -0.0235（ -0.33） -0.1986***（ -3.76） 0.4227***（ 9.92）

lnopen 0.0048***（ 0.84） 0.0631***（ 5.03） 0.0283***（ 6.16）lnnonsoe 0.5527***（ 4.17） 0.8157***（ 8.26） 0.1672（ 3.87）

lngov 0.3352***（ 6.54） 0.0221（ 0.62） 0.4575***（ -6.82）Sargan test 0.364 0.174 0.169Hansen test 0.178 0.245 0.114

AR(2) 0.132 0.171 0.390Province 31 31 31

Introduction




Table 2 The internal mechanismLnrural: Insurance claims plays a significant positive effect on rural per

capita income growth. • One of the functions of insurance is the economic compensation. Agricultural

insurance claims can compensate farmers’ economic losses which caused by the natural disasters. On the other hand, agricultural insurance is good for stabling and sustaining the development of agriculture. Therefore, agricultural insurance claims can indirectly stable the income of rural residents, which results in narrowing income gap.

Lnurban: The results show that there is no significant correlation between agricultural insurance and urban per capita income.

• The reason why is that the agricultural insurance is mainly related to agriculture, and the city basically does not conduct with agricultural production.

Agricultural insurance claims has a significant positive correlation GDP per capita.

Introduction




Agricultural insurance and Economic development

In table 2, all of the regression equation, agricultural insurance has a significant negative effect on urban-rural income gap after the per capita income(gdp) as a controlled variable.

Therefore, we put forward the following question:When we treat gdp as economy development and remove it , whether

the negative effect of agricultural insurance on the income gap depend on economy development or not?

Introduction




Table 3 Estimation


VariableOLS (1) RE (2) FE (3) GMM (4) GMM (5)

L.lngap - - - 0.3244***（ 4.60） 0.3271***（ 4.71）lnclaim -0.0153*（ -1.85） -0.0153***（ -2.97） -0.0162***（ -2.65） -0.0126***（ -2.43） -0.0082***（ -2.71）

lnfi -0.1729***（ -3.24） -0.1729***（ -4.37） -0.1842***（ -4.41） -0.1128***（ -4.22） -0.1271***（ -22.24）lnedu 0.0917（ -3.24） 0.0917*（ 1.85） 0.1179**（ 2.09） -0.0625**（ -2.26） 0.1185***（ 8.54）lntra 0.0313（ 0.63） 0.0313（ 1.21） 0.0344（ 1.29） 0.0610***（ 4.14） -0.0326**（ -2.15）lnubr -0.1231（ -0.78） -0.1231（ -1.61） -0.1329**（ -1.68） - -0.2737（ -9.40）

lnopen 0.0621*（ -1.99） 0.0621***（ -3.90） 0.0642***（ -3.83） - 0.0636**（ -8.20）lnnonsoe 0.3525*（ 1.83） 0.3525***（ 2.71） 0.3484**（ 2.13） - 0.2464***（ 3.65）

lngov 0.0004（ 0.01） 0.0004（ 0.01） -0.0205（ -0.45） - -0.0737*（ -7.55）Sargan test - - - 0.355 0.114Hansen test - - - 0.351 0.213AR(2) test - - - 0.263 0.563Province 31 31 31 31 31

Introduction




Table 3 AnalysisFirstly, it is still a negative correlation between agricultural

insurance and rural-urban income gap. This means that when we removed the controlled variable of gdp, the result is still significant.

Secondly, compared to table 1 and table 2, whether to join the per capita income variable or not, the agricultural insurance also has significant negative correlation with urban-rural income gap.

In short, the negative effect of agricultural insurance on the income gap is not dependent on the level of economic development.

Introduction



Conclusion

Conclusion

The empirical results show that China's agricultural insurance significantly narrows the urban-rural income gap.

Inner mechanism Agricultural insurance claims have a significant positive correlation with the rural per capita income, but have no significant correlation with the urban per capita income.

However, due to the development of agricultural insurance is relatively backward, uneven regional development, the level of protection is limited. And the development of agricultural insurance can’t effectively meet the farmers’ need of responding to major natural disasters. Therefore, this role is also very weak.

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Thanks!

tan yi yuan yuan school of insurance, central university of finance and economics

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